The Annual Pace of Inflation Climbed in December to 4.8%, a Pace That Hasn’t Been Seen Since September 1991
Headline inflation in Canada hit a 30-year high at the end 2021 with warnings from economists that the pace of price increases could rise even higher and stirring expectations of a central bank response before the month is over. Statistics Canada reported that the annual pace of inflation climbed in December to 4.8%, a pace that hasn’t been seen since September 1991.
Here is a provincial breakdown for December (previous month in brackets):
- Newfoundland and Labrador: 4.2% (4.2%)
- Prince Edward Island: 6.7% (7.0%)
- Nova Scotia: 4.8% (5.3%)
- New Brunswick: 5.4% (5.7%)
- Quebec: 5.1% (5.2%)
- Ontario: 5.2% (5.0%)
- Manitoba: 4.7% (4.6%)
- Saskatchewan: 3.5% (3.7%)
- Alberta: 4.8% (4.3%)
- British Columbia: 3.9% (3.6%)
Driving growth on the consumer price index were prices for groceries that climbed year-over-year by 5.7% — the largest bump in a decade — and for housing that climbed by 9.3% compared with December 2020. Furnishing homes also got more expensive compared with the same month last year: Prices for household appliances rose by 8.9% for the largest yearly gain since June 1982.
Shelter costs, meanwhile, jumped 5.4% over the past year. There was a 9.3% spike in home and mortgage insurance costs, which Statistics Canada said may have been partly attributable to an increase in the frequency and severity of weather-related claims due to fires and flooding.
And despite a month-over-month dip in prices at the gas pumps with demand dampened by renewed public health restrictions related to the Omicron, gasoline prices were still up 33.3% year-over-year in December. Statistics Canada said that excluding gasoline prices from its calculations, the consumer price index would have been up year-over-year in December by 4%.
Since then, gasoline prices have risen anew as global oil prices reach back to pre-pandemic highs, and supply-chain issues that have slowed the flow of in-demand goods and food continue to pressure grocery prices. BMO chief economist Douglas Porter said those two issues, coupled with reports of labour shortages suggest inflation rates may yet rise higher despite widespread hope that they had hit their peak. “I’m not at all relieved or relaxed on the inflation outlook. I am quite concerned that we could have more of an inflation issue than I think is commonly believed among economists.”
Statistics Canada said the consumer price index for the full year of 2021 rose at its fastest rate since 1991, pointing to widespread global supply-chain constraints and the release of pent-up consumer demand as the economy reopened. The year-over-year change in prices in December outpaced gains in wages over the same stretch. Statistics Canada said wages rose 2.6% between December 2020 and December 2021, meaning Canadians saw a drop in their purchasing power.
Tu Nguyen, an economist with accounting firm RSM Canada, said that drop in purchasing power disproportionately impacts lower-income households. “Not only are their wages not likely to keep up with inflation, but their jobs are also less likely to be remote, which means they cannot avoid spending money on gas,” she said.
December marked nine months in a row that headline inflation has come in above the Bank of Canada’s target zone of between 1% and 3%. The country hasn’t seen a streak that long since before the central bank began targeting inflation at 2% in the midpoint of its comfort range.
The average of the three measures for core inflation, which are considered better gauges of underlying price pressures and closely tracked by the Bank of Canada, was 2.93% for December, up from the 2.73% reported in November. The average was last that high in September 1991.
Scotiabank chief economist Jean-François Perrault said he now expects inflation to stay well outside the central bank’s target this year and next, noting that data from the bank suggest similar expectations from households and firms.
The Bank of Canada has said that it would act to stop runaway inflation, and is scheduled to make a rate announcement at the end of January. Perrault expects the bank to start raising rates, and is forecasting the rate will hit 2% by the end of 2022.
The only reason to delay may be to see what happens with this latest wave of the pandemic, which has seen a surge in cases and hospitalizations, as well as higher absenteeism rates as exposed workers isolate at home. If the bank delays acting, Porter said to expect a warning of rate hikes starting in March to at least manage inflation expectations and start to cool demand for goods.
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Retail Sales Climb 0.7% in November to $58.1 Billion
Retail sales rose for the second month in a row in November as Canadian consumers spent more on gasoline, building materials as well as food and beverages, Statistics Canada said. Yet the uptick in retail sales of 0.7% to $58.1 billion fell short of analyst estimates.
It was also down from the 1.6% growth recorded in October, indicating a slowdown after the promising burst in spending posted early last fall. The potential drop-off in spending is underscored by Statistics Canada’s preliminary estimate for December, which pointed to a decline in retail sales of 2.1% for the month. Though the agency cautioned its early estimate would be revised, it suggests a rocky economic recovery as periods of growth could be followed by setbacks.
“While we were expecting to see weakness in December, the decline appears to be a little larger than we were anticipating,” Andrew Grantham, a senior economist with CIBC Capital Markets, said in a client note. If advance data for manufacturing and wholesaling also fall short of expectations, it could mean that December GDP was weaker than expected, he said. “Signs of softening in the economy before the worst of the case counts and restrictions hit may also tip the scales slightly in terms of the Bank of Canada holding rates next week and waiting for signs of a recovery before hiking,” Grantham said.
The slowdown in spending — even before the worst of the Omicron surge in cases and accompanying restrictions — prompted economists to issue muted projections for the coming months. The Conference Board of Canada said it expects retail sales to decline over the next two quarters before expanding moderately during the second half of 2022.
“While we are still optimistic about the future, new waves of the virus could deter our outlook despite Canada’s high vaccination rate,” the think tank said in its latest Economic Quick Take. “As we’ve learned with Omicron, widespread lockdowns are not entirely a thing of the past.”
Statistics Canada said severe flooding in British Columbia and parts of Atlantic Canada damaged infrastructure and disrupted business operations. Among retailers in the region surveyed, 21% said sales were impacted by the floods — mainly due to transportation disruptions.
Overall, November’s uptick in retail sales was led by a 4.9% surge in gas station sales, a 3% increase in sales at building material stores, garden equipment outlets and supplies dealers, and a 1% increase in food and beverage stores sales.
Core retail sales across Canada — which exclude gasoline stations and motor vehicle and parts dealers — increased 0.5%, the agency said. Some of the bright spots in consumer spending included sales of clothing and clothing accessories, which increased 3% in November. Sales at jewelry, luggage, and leather goods stores rose 5.7%.
Sales in November climbed in six of 11 subsectors, representing nearly 63.8% of retail trade, Statistics Canada said. In volume terms, retail sales were up 0.2% in November.
BMO Capital Markets economist Shelly Kaushik said retail sales managed a decent gain in November though much of it was due to higher prices as inflation eroded purchasing power.
Statistics Canada reported that on a seasonally adjusted basis, retail e-commerce sales fell 3.5% in November. However, on an unadjusted basis, retail e-commerce sales were up 1.1% year over year to $4.3 billion in November, accounting for 6.9% of total retail trade. The share of e-commerce sales out of total retail sales fell 0.4% compared with November 2020, coinciding with limited Cyber Monday sales at retailers amid supply chain constraints in November 2021.
Looking ahead, Ksenia Bushmeneva with TD Economics said the picture for retail spending is mixed. “Capacity limits, staff absenteeism and health concerns may weigh on in-store sales at the start of the year,” she said in a note. “Supply-chain bottlenecks are also likely to intensify once again, leading to delayed shipments, higher prices, and less choice for consumers.”
Retailers with online operations though could also see a boost to their sales as consumers redirect their spending from services to goods, similar to previous episodes of lockdowns, Bushmeneva said.